Iran’s failing economy – Actually it really is rocket science

That Iran’s economy is in sharp decline is hardly a matter for debate. According to the BBC, in real terms, Iranians have become 15% poorer during the past decade. And in some parts of the country, unemployment stands at a mind-boggling 60%. This week, Iran’s economic woes came into sharp focus, as the local currency plummeted to 60,000 rials to the US dollar, compared to 40,000 rials last year. This prompted a scramble for foreign currency, until the Iranian authorities imposed drastic restrictions on dollar trading.

Of course, this drama is merely a symptom of a much longer-term problem. Why is one of the planet’s most oil-rich countries in such an economic mess? Certainly, international sanctions have played a role in Iran’s financial struggles. But this is only one part of a much bigger puzzle. Endemic corruption is responsible for untold billions being siphoned off over the years. So much so, that even President Rouhani has referred to corruption as a “national security threat.”

However, what Rouhani is less likely to publicly admit is his own government’s chronic economic mismanagement and that of his predecessors. The failure to manage Iran’s economy in a proper and responsible fashion is the single most important explanation for Iran’s failure to prosper, despite its huge natural resources. A Washington Institute study revealed that the government’s payment arrears stand in excess of an alarming 30% of GDP. Relatively straightforward measures which could alleviate the overall situation, such as reforms to slash the time it takes to clear exports in less than the current 25 days, have simply not happened.

But one of the Iranian government’s biggest economic policy failures, which continues in earnest today, is the determination to invest handsomely in military development and foreign armed proxies, rather than the services and infrastructure which would benefit the Iranian people. The calculation is frighteningly simple, it is a basic trade-off. It isn’t rocket science, although the country’s public coffers are too often spent on the development of rockets and other military hardware.

Straightforward statistics on Iran’s military spending are hard to come by. But, let’s assume that President Rouhani’s own figure of at least $10 billion outlined in this year’s budget is a starting point. Bear in mind that it doesn’t even take into account the money Iran spends on intelligence or arming local proxies such as Hezbollah. These are budgets Iran is unlikely to ever reveal publicly. But we can safely assume that they are significant. In short, Iran’s military spending is likely to be a large chunk of the country’s $104 billion total state budget. It is also worth noting that Iran’s leaders have overseen a 128% increase in military spending over the last 4 years – a period during which Iran has been subjected to sanctions. Germany, France and others should consider how this figure might increase further, once Tehran feels unburdened by sanctions.

So how does the tens of billions of dollars spent on the military compare to other areas of funding? For a start, it dwarfs the $7.98 billion spent on education in 2016. And with welfare payments in Iran recently slashed by $5 billion, a Forbes columnist recently calculated that the Iran Revolutionary Guard Corps (IRGC) will receive money equal to cash handouts for 49 million people per year. The same article reveals that had Rouhani not increased the IRGC budget by 42%, at least 21 million Iranians would be receiving subsidies. The Iranian public is learning the hard way that what the hand gives, it can also take away.

The impact on people’s lives is very real. It is not theoretical finance or impregnable macro-economics. Iranians are feeling the pinch and they are increasingly understanding the reasons behind it. In Isfahan recently, women wearing the Islamic chadour, took to the streets to protest against water shortages – They chanted “Our enemy is here, it is not America”. Demonstrators elsewhere targeted the leadership with the slogan “Forget about Syria, think about us”. They well understand that Iran’s deep commitment to Assad, Hezbollah and other conflicts are a direct cause of their plight. If the Iranian people can clearly see that the route of their problems is the regime’s military adventurism, then how long will it take the rest of the world to recognise it?

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